JPY Weakness Continues to Trigger Change in Rhetoric From Japanese Officials

JPY: BoJ Governor Ueda’s hawkish comments provide support for JPY

Overnight, the Japanese yen surged in strength, driven by the hawkish remarks made by BoJ Governor Ueda. Consequently, the USD/JPY pair retreated toward the 146.00 level, slipping further below last week's high of 147.87. The primary catalyst for this reversal in yen weakness stemmed from Governor Ueda's comments to the Yomiuri newspaper. He suggested that by the year's end, there may be sufficient data to evaluate the trajectory of wage increases—a crucial factor in deciding on monetary policy tightening. Furthermore, he hinted that if the BoJ becomes confident in the sustainability of rising prices and wages, they might consider ending their negative interest rate policy. When questioned about the timing of such a move, Governor Ueda stated that it remained an option, contingent on stronger-than-expected economic performance and price levels. However, the BoJ would need to ensure that the inflation target could still be met after adjusting the policy rate.

It is evident that these comments were designed to provide near-term support for the yen and discourage speculative yen selling. Notably, last week, the Japanese government expressed heightened concerns about yen weakness by raising the threat of intervention to its highest level.

Governor Ueda's remarks may serve as an attempt to buy time and increase market participants' caution. The fear is that continued yen depreciation could intensify pressure on the BoJ from the government to expedite policy tightening and rate hikes.

Tokyo analysts share a similar perspective with Governor Ueda. They anticipate that wage developments will bolster the BoJ's confidence in sustaining higher inflation by the end of this year. Their current forecast suggests the end of Yield Curve Control (YCC) in the first quarter of next year, followed promptly by a 0.20-point rate hike in the second quarter. This shift towards a tighter BoJ policy aligns with my outlook for the yen to rebound in the coming year, particularly from its deeply undervalued levels. Nevertheless, it is possible that the yen may experience further declines in the months ahead.

In conclusion, an increasingly hawkish stance from the BoJ, coupled with the heightened possibility of intervention, should act as a mitigating factor against any substantial depreciation of the yen soon.

SPECULATIVE JPY SHORTS HAD BEEN REBUILDNG OVER THE SUMMER

Source: Bloomberg, Macrobond & MUFG Research calculations

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